Profitability and Added Value

Profitability and Added Value

As we will be devoting the majority of this course to understanding how we can innovate and leverage opportunities in sustainability, I would like to take this section to provide two readings examining correlations between high performing sustainability programs, increased organizational profitability over peers, and leading management processes.

The first reading is jointly authored by The Boston Consulting Group and MIT Sloan Management Review, and reflects survey results from more than 1500 executives and high-level managers, and in-depth interviews with more than 50 thought leaders. It has quite a few interesting insights into sustainability's benefits to the business model and profitability, but below is one which nicely illustrates the ties between shareholder return and sustainability efforts.

Credit: Maurice Berns, et al. “Finding from the First Annual Business of Sustainability.” MIT Sloan. September 9, 2009.

Sustainability Efforts Could Influence All the Levers That Companies Use to Create Value
Click to view a text version

The potential impact of sustainability efforts includes:

• A stronger brand and greater pricing power
• Greater operational efficiencies
• More efficient use of resources
• Supply chain optimization
• Lower costs and taxes
• Enhanced ability to attract, retain, and motivate employees
• Greater employee productivity
• Improved customer loyalty; lower rate of churn
• Enhanced ability to enter new markets
• More potential sources of revenue
• Lower market, balance-sheet, and operational risks
• Lower cost of capital
• Greater access to capital, financing, and insurance

This is a shorter piece, centered on one, rather in-depth analysis of long-term performance. RobecoSAM, the auditing firm known for its international Sustainability Yearbook rankings, examined the sustainability profile of more than 500 companies a year over a 13-year dataset to create a five-level tier of their approach to sustainability. From Leader to Laggard, they then evaluated the financial performance of those companies over the same period. Below is a central finding of that research:

Credit: Alpha from Sustainability by RobecoSAM, Sustainability Yearbook

Sustainability can Outperform
Click to view a text description

The results of the statistical analysis are shown in the graph. The green line tracks the cumulative outperformance of Portfolio 1 "Sustainability Leaders" versus the overall sample of the companies. The black line tracks the cumulative underperformance of Portfolio 5 " Sustainability Laggards" versus the broader sample. The turquoise line tracks the outperformance of an investment strategy that consists of maintaining the sustainability leaders on a long position and short-selling the sustainability laggards.